1. Strategic report Competitive Advantages Competitive Advantages STRONG FINANCIAL PERFORMANCE AND FINANCIAL STABILITY The bank has been profitable over many years of organic growth. The bank’s total assets rose by 55% from 31 December 2016 to 31 December 2019, while its return on equity was 14.2%. Thanks to its successful, ever-profitable business, shareholder support and sizeable liquidity buffer, MKB is able to show strong performance not only in periods of economic growth, but also amid financial turbulence. It is characteristic of the bank to maintain a stable funding profile and strong capital adequacy ratios: its 2019YE total capital adequacy ratio was 21.2%, one of the highest among its peers. THE BANK’S SUSTAINABLE BUSINESS MODEL Balanced loan portfolio structure focusing on corporate lending with large and medium-sized businesses (including Russian blue chips) prevailing. Active development of investment banking business to deliver synergy with corporate and retail businesses and propel further growth of the bank’s business. Balanced growth of retail business, based on a deep understanding of the target customer and a focus on customers with a high credit rating. Use of cross-selling and other channels for retail customer acquisition and servicing, including the bank’s 6,800 payment terminals that provide access to the payment history of every second person applying for a loan. This unique source of information minimises the risk of fraud associated with walk-ins and ensures a high-quality growth of the business. A cash handling service is another risk monitoring and control tool; it helps monitor the liquidity risks of certain customers representing in the wholesale and retail trade segment. HIGHEST SERVICE STANDARDS: A FLEXIBLE AND INNOVATIVE APPROACH TO BANKING SERVICES Pursuing a flexible customer policy and fast decision-making thanks to proven procedures. Constant improvement of customer experience, using advanced information technology and offering innovative products. Active development of delivery channels, including full-scale branches working until late 7 days a week to sell banking products and provide a wide range of financial options. Active development of remote banking channels: MKB provides electronic payment systems and online banking services to corporate customers, as well as online and mobile banking services to retail customers. Remote sale channels such as online banking, and physical sale networks such as payment terminals together provide MKB’s customers with access to services seven days a week. Giving customers access to a Russia-wide unified system of payment devices thanks to partner programmes with other major Russian banks. HIGHEST RISK MANAGEMENT STANDARDS: EMPHASIS ON ASSET QUALITY Conservative risk management approaches, strict underwriting procedures and unique risk monitoring tools help maintain a low level of overdue loans compared to the bank’s peers. Lending to high-quality corporate borrowers and, retail-wise, to existing customers, corporate customers’ employees and partners, and public sector employees. Well-managed loan portfolio quality with an average NPL ratio of 2.5%Weighted average of year-end figures for 2016-2019. and cost of risk of 2.3%Weighted average of year-end figures for 2016-2019.. Low-risk securities portfolio with virtually no investments in high-risk instruments such as shares or securities of limited liquidity. HIGH OPERATIONAL EFFICIENCY WITH FURTHER GROWTH POTENTIAL Maximisation of operational efficiency through centralised decision-making, concentration on the corporate segment, and active development of remote service channels and innovative products, reducing the workload of the bank’s branches. A well-managed average cost-to-income ratio (CTI) of 33.2%Weighted average of year-end figures for 2016-2019.. A fast follower strategy – prompt implementation of innovative technologies, and participation in key fintech initiatives. Recently, MKB has been focusing on access to new solutions to increase its business efficiency, in particular, through membership in the Interbank Information Network, SWIFT, Faster Payments, FinTech Association, FinTechLab and other financial market development organisations, and it has further been introducing new solutions to its systems, including artificial intelligence programs. ACTIVE INTEGRATION OF CORPORATE SOCIAL RESPONSIBILITY INTO BUSINESS PROCESSES Best corporate governance practices in compliance with EBRD requirements: the Supervisory Board includes experts of international standing; its committees work effectively, adhering to high international corporate governance standards. Stimulating economic growth while improving social wellbeing: support for SMEs, special offers for pensioners and young families and accessibility of financial services for people with reduced mobility. Environmental standards for the loan portfolio: evaluating projects for compliance with Russian and EBRD environmental, health and safety requirements. Management engagement in decisions related to environmental policies and reporting. One of the most transparent Russian companies.